 What
is an annuity?
The term "annuity" means a series of payments made at stated intervals
until a particular event occurs. Usually, an annuity ends with the death
of the holder but it can be designed to be paid during the lives of more
than one person. It is normally secured by payment of a single premium
to an insurance company. An annuity that is to come into payment
immediately after it is bought is known as an "immediate annuity".
Is an annuity the same as a retirement annuity contract?
No. A Retirement Annuity Contract (RAC) is mainly designed for the
self-employed and for those who are not in pensionable employment to
enable them to accumulate funds to provide for their retirement. The
benefits secured are available in the form of a capital sum. This is
paid partly in cash to the holder of the RAC. The balance may be used to
buy an annuity, although other options are also available.
What is a deferred annuity?
This is an annuity, whose payment is postponed until some time after it
is bought. The most common use for a deterred annuity is to secure a
preserved or a deferred benefit for an individual who has left the
service of an employer, or in a case where a pension scheme is being
wound up. These contracts are often called "Buy-Out Bonds" or Personal'
Retirement Bonds (PRBs) and are referred to in the Pensions Act as
"approved policies". The pension benefits secured by these policies
normally are expressed in the form of a capital sum to be paid at
retirement date and this capital is then used to secure an immediate
annuity.
Must an annuity be bought when I retire?
If you are a member of a large defined benefit scheme, it is quite
possible that an annuity will not be bought. The decision to secure your
benefits by buying an annuity is an investment decision for the trustees
of the scheme. However, if you are in a smaller scheme funded by an
insurance contract, an annuity must be bought. If you are in a defined
contribution scheme, an annuity will almost certainly be bought for
practical reasons. Annuities bought in this way are called "Compulsory
Annuities". The reasons for buying these annuities arise from tax law
and because an annuity is the most certain way of guaranteeing that a
pensioner will receive an income for life. Following the 1999 and 2000
finance acts, self-employed people, proprietary directors and holders of
Additional Voluntary Contributions have additional options open to them
and may be able to choose not to buy an annuity.
Must an annuity be bought from an insurance company?
Yes. Under European regulations, an annuity is classed as life assurance
and can only be bought from a company licensed as a life assurance
company.
Who Buys an Annuity?
An annuity bought with the proceeds of an occupational pension scheme is
bought by the trustees of that scheme. A person who has a Retirement
Annuity Contract is the purchaser of an annuity bought with the proceeds
of such a contract.
Are Pension Scheme Death Benefits Used to Purchase Annuities?
Any part of a death benefit under an occupational pension scheme which
cannot be paid as a cash sum must be used to provide a pension for one
or more of the dependants or beneficiaries of the deceased scheme
member. An annuity will usually be purchased by the trustees to provide
such pensions.
Is it possible to buy an annuity with my own money?
Yes. An annuity bought with your own money is called a "Purchased Life
Annuity". This is usually bought by someone who wishes to guarantee a
certain level of income for as long as they live or die. These annuities
can be quite tax effective.
When an annuity is bought does it cease to be paid when I die?
That depends on the terms chosen by the purchaser. It is possible to buy
an annuity that is paid simply for your own lifetime, It is possible to
incorporate a minimum guaranteed period of payment, so that the annuity
continues to be payable for a fixed period, whether you live or die.
Should you survive longer than the fixed period, the annuity would
continue to be paid. It is also possible to buy an annuity which
continues to be paid to a dependant after your death. The conditions of
an annuity policy bought by the trustees of an occupational pension
scheme must reflect the rules of that scheme. |
When an annuity is bought, is the amount fixed for my lifetime?
Not necessarily. Again this depends on the terms chosen by the
purchaser. You can buy an annuity which is payable as a level amount
throughout your lifetime, or one which increases during payment at a
fixed percentage.
Do I have any say in the kind of annuity that is bought?
If you are a member of a defined contribution pension scheme, you will
generally have a choice as to what features are incorporated in your own
annuity contract. Thus, you will be able to decide for how long the
annuity payments will be guaranteed, whether they revert to a dependant
after your death, whether they remain level or increase during payment.
The important thing to remember is that each different variation has a
cost attached and this means that your own personal pension will change,
according to the options that you select.
Do I have a say in where my annuity is bought?
If you are the holder of an RAC, you may choose the insurance company
from which the annuity is bought. If your annuity is being bought from
an occupational pension scheme, the responsibility is solely with the
trustees in a defined benefits scheme. Remember, in a defined benefit
scheme the cost to the scheme of buying the annuity will not affect your
benefit - that is promised. In a defined contribution scheme, the
trustees may very well consult you on the choice of annuity provider.
However, you have to remember that the eventual responsibility for
buying the annuity remains with the trustees.
What influences the decision to use a particular insurance company?
Generally, the trustees will be looking for the best value for money
that they can get - the rate that is available on the date your annuity
is bought will remain in place for life. However the trustees must also
take other considerations into account, such as the standard of service
that you can expect from an insurance company, as you will expect your
pension to be paid on time.
How often will my annuity be paid?
Annuities are generally paid monthly. If the rules of your occupational
pension scheme specify monthly payment in advance, then the first
instalment is due as soon as the purchase price is paid. If the pension
is to be paid monthly in arrears, the first instalment will be paid a
month after the annuity is bought. Depending on the administration
arrangements of the insurance company concerned, an annuity may be paid
precisely on the same day each month after it is bought, or, in some
cases, on the first day of each calendar month. It is possible,
particularly if an annuity is quite small, to arrange for it to be paid
less frequently than monthly - for example, quarterly, half-yearly or
even annually.
What form do annuity payments take?
The most common method of paying annuities is still by cheque, posted to
your home on a monthly basis. Some pension schemes will be able to
arrange for payment to be made to your own bank account by direct
lodgement. It is most unusual for annuities to be paid in cash.
Are annuities subject to tax?
If an annuity results from your membership of an occupational pension
scheme, then the annuity payments are subject to the normal tax
deductions under the PAYE system. However you do not pay full PRSI on
your pension, but only Class K contributions which are currently at the
rate of 2%.
If you bought a "purchased life annuity" (i.e. with your own money) part
of each instalment will be paid tax free. The remainder will be taxed at
the standard rate of tax. If your tax rate is higher than the standard
rate, you will have to pay the difference. Likewise, if you have an
overpayment of tax at the year end, you will be able to recover any
amount overpaid.
Annuities bought by the self-employed will continue to be taxed as the
self-employed person is taxed. Tax is normally deducted at source by the
Life Assurance Company at the standard rate and the taxpayer must pay
the difference if he or she is liable for higher rate tax.
What is the tax position if I go to live abroad?
Generally, it is possible for the trustees or administrators of a
pension scheme to get permission to pay an annuity to a person living
overseas without deducting Irish tax. This depends on where you are
living, and whether there is a double taxation agreement in force
between that country and Ireland. You should make enquiries when the
annuity is being set up, or when you decide to leave Ireland, if that is
later.
My pension has a "Guaranteed Annuity Option" - what is that?
In the past, it was quite common for pension policies, particularly
"with-profits" ones, to guarantee the annuity rates at which capital
could be applied to buy a pension at retirement. When interest rates are
very low, some of these guarantees will be extremely attractive. Before
you, or your pension scheme trustees, come to any conclusions as to
where a pension will be bought, it is advisable to check the wording of
each policy document, to see if there are any guarantees attaching in
terms of annuity rates. If there are, it might be best to leave the
benefits exactly where they are and purchase the pension from the
holding insurance company. This is an area in which professional advice
should be obtained.
What happens to the balance of the purchase money if I die soon after
the annuity commences?
Once an annuity is bought, the purchase price is always retained by the
insurance company. This does not have to mean that nothing at all is
paid to your surviving relatives or dependants. Annuities can be
arranged to include a minimum guaranteed payment period. They can also
be arranged on a "joint life" basis, which means that payments would
continue to be made to another person after your death.
What is an impaired life annuity?
There is a limited market in this type of annuity. If an individual is
not in normal health for a person of their age and sex, some insurance
companies may be prepared to offer a better annuity rate, simply because
there is the possibility that they might not have to pay out the annuity
for the "average" expected lifetime. If you are not in perfect health at
the time your annuity is being bought, it is advisable to have this
option investigated.
Where I have a choice, is an annuity good value?
There is no simple answer to this question. At its most obvious, if you
live for a very long time after buying an annuity, the payments, which
are guaranteed for your lifetime, will represent very good value. If you
buy an annuity when interest rates are very low, you will receive
payment based on these low interest rates for life. Therefore, if
interest rates rise after you buy the annuity, you may see it as poor
value for money compared to what might then be available. If your main
priority is to make sure that some of the capital passes to your
surviving spouse or children on your death, an annuity will not be the
best way to achieve this. It is very important, if you have a choice
whether to buy an annuity or not, that you get very detailed advice
based on your own circumstances and priorities before you make a
decision. |
|
